The Becker-Posner Blog

Reforming the American Health Care System-BECKER

Health care reform in the United States is receiving lots of attention recently from politicians and the media, and major changes in federal as well as state health law are likely. In thinking about reforms it is crucial to recognize that the American system has many strong features that should be preserved, such as the predominant role of private physicians, private hospitals, and private HMO's that compete against each other for patients and health care dollars. I will not undermine these strengths in my discussion of how to correct a couple of problems. President Bush's recent State of the Union Address tackled two defects: the tying of health insurance to employment, and the over 40 million persons who are not covered by insurance. The President proposes a standard tax deduction for anyone with health insurance equal to $15,000 for families and $7,500 for individuals. This means that families with health insurance will pay no income or social security taxes on the first $15,000 of their income, while individuals with health insurance will pay none on the first $7,500 of their income. This would increase the tax benefits from health insurance to anyone who is not now covered by employer provided health insurance. All health coverage provided by employers above the $15,000 family cap would be taxed as ordinary earnings. Leveling the tax playing field between those with individual health insurance and persons with employer insurance is desirable, as is encouraging widespread insurance coverage of individuals and families. The first could be achieved either by taking away the current tax benefits of employer based health insurance plans-which I would prefer, and the President proposes to do for the more expensive plans- or by extending the same benefits to individual health plans, as is in the President’s proposal. The second is best achieved by making basic catastrophic health insurance compulsory for everyone, and concentrating government financing of health care on the poor who do not have sufficient resources to get their own insurance. Under the present system, employed workers get tax benefits when their employers make contributions to employee health insurance plans because employees do not have to report employer contributions as part of their taxable income. Since there are no limits on how much can be deducted, employers competing for employees have an incentive to take out more extensive and expensive coverage than employees would want if employees had to pay the full costs. Wages paid do tend to adjust downward to take account of the value to workers of health benefits and other "fringe" benefits, which is less than the cost to society because of the tax advantages. The President's proposal is designed to make the same tax benefits from health insurance available, regardless of whether or not employers provide the insurance. The $15,000 family cap would save the federal government tax revenue, and also would discourage more elaborate insurance plans that often add little to healthiness, but are artificially cheaper because of tax benefits. Since under present tax law, medical expenses has to exceed 71/2 % of a family’s taxable income before this spending begins to be tax deductible, it is very hard to get any tax benefits with individual health insurance. This aspect of tax law helps explain why so many Americans do not have any health insurance. The proposed tax deductibility for persons with their own health insurance plans would sharply reduce the net cost of getting private health insurance for many of the almost 47 million Americans who presently do not have such insurance, Medicaid, Medicare, or are under the 10 year old State Children's Health Insurance Program. It would also contribute to leveling the playing field between persons who get health coverage through jobs, and those who must get insurance as individuals, perhaps because they have no job, or are self-employed, or their employers do not provide health insurance. The proposed reform should therefore significantly reduce the number of Americans without health insurance. The tying together of health insurance with employment is partly a legacy of World War II, when employers began to offer health insurance as a fringe benefit to help them compete better for workers whose wages were regulated by the wartime government. Employer-provided health insurance expanded over time even after wage controls were abolished because income tax rates rose greatly over time. This artificial incentive to combine health insurance with employment would be eliminated under the President's proposal. Aside from humanitarian concerns about the wellbeing of others, why should it matter to the rest of us if individuals and families, many of who are young and healthy, do not have health insurance? The main reason usually given is that since all persons must be accepted for treatment by hospital emergency rooms, regardless of whether they have insurance, taxpayers and other hospital patients who do have insurance bear the cost of treating persons without insurance. Due to this "externality", persons without health insurance impose costs on others whenever they use emergency health care facilities. The ability to avoid paying for medical care by going to an emergency room encourages some persons not to have their own medical insurance. Yet this incentive is limited since emergency room care is neither the most effective nor the most pleasant. A few studies indicate that emergency rooms are not used disproportionately by the uninsured, probably because they are mainly young and healthy, so the total cost imposed on others of emergency room visits by the uninsured is likely not large. Moreover, the President's proposed tax savings for those with private insurance also hurts taxpayers by creating a tax advantage for persons with private insurance, although his proposal is supposed to be tax neutral by eliminating deductibility for insurance above the $15,000 cap. Even if the uninsured did use emergency room care a lot and thereby raised the costs of others, a better way to handle that would be to mandate that everyone purchase basic health insurance that covers catastrophic health problems. Several state governors, including Mitt Romney of Massachusetts and Arnold Schwarzenegger of California, have recently proposed that all of their state residents be required to get health insurance. The State of the Union Address also contains a proposed federal subsidy to help states pay for the coverage of the poor and sick for states that require basic health insurance for all residents. Making some coverage compulsory for all, and then subsidizing only the coverage of poor families, is the right way to go.

Health Care Reform--Posner's Comment

From an economic standpoint, President Bush's proposal to treat as taxable income of employees the amount of employer health insurance that the employee receives in excess of $15,000 a year for a family or $7,500 a year for an individual is a step in the right direction. But, from that same standpoint, his proposal to subsidize the purchase of individual (nonemployer-provided) health insurance, in order to reduce the number of people who have no health insurance (now almost 47 million), is a step in the wrong direction. I cannot think of a good reason for subsidizing health insurance, or, indeed, for the demand for noncatastrophic health insurance. The economic explanation for insurance is that because of diminishing marginal utility of income, people will pay to avoid a big financial loss (e.g., will pay $2 to avoid a 1/100,000 prospect of a $100,000 loss, even though the actuarial cost of such a prospect is only $1), but most medical expenses are modest. So if there were no tax subsidy for health insurance, probably much less would be purchased, which would be fine. People might even be healthier, because diet and other life-style choices are substitutes for medical care and thus for health insurance. The fact that millions of people have no health insurance does not strike me as a social problem. It is true that they are free riders, but so to a considerable degree are the insured, since their premiums don't vary much or at all with how much health care they obtain. As Becker points out, the quality and conditions of charity medical treatment (such as long queues in emergency rooms) discourage overuse of "free" medical care--it isn't really free, because the nonpecuniary costs are substantial; among those costs are the fear and discomfort associated with medical treatment. Becker also points out that the uninsured are not the most frequent visitors to emergency rooms. Many of them can afford to pay at least the modest expenses that are all that are required to to obtain most medical treatments in the market. They do not need to resort to charity and indeed, unless they are indigent, they are ineligible for it. The choice not to carry health insurance is of course influenced by the fact that individual as distinct from group health insurance is very expensive. There is a good reason for this--adverse selection. Sickly people are the most likely to insure, driving up premiums and causing the healthy to drop out of the insurance pool. This effect is reduced when insurance is tied to employment, both because the sickly are less likely to be employed and, more important, because the healthy cannot opt out without quitting their jobs. The combination of high premiums and low demand observed in the individual insurance market is thus an efficient combination. I see no need for public intervention, as proposed by the President. The best, though politically unattainable, reform would be to abolish Medicare, brutal as the suggestion sounds. Then people would purchase catastrophic or other medical insurance for their old age, or depend like the young on charity. If it were thought "unfair" to make elderly people of limited means pay for their entire costs of health care, there could be a subsidy, but it should be means-tested, unlike Medicare. Why taxpayers should pay the medical expenses of affluent oldsters, of whom there are a great number, is an abiding mystery, at least from an ethical as distinct from a political standpoint. There is widespread concern, though to a considerable extent politically generated, with the total amount of money spent on health care in the United States. To the extent that the money is spent by individuals or firms without any public subsidy, there is no economic problem. If people want to spend more of their money on medical care and less on food or housing because they greatly value good health and longevity, that is their free, legitimate, and authentic choice. It is a sign of affluence that the nation can afford to devote so high a percentage of national income to medical care. The Detroit auto manufacturers complain that the high costs of their employer health insurance makes it difficult to compete with foreign firms. That is not a social problem, and indeed makes little sense. Foreign firms such as Toyota manufacture cars in the United States, yet are able to control their labor costs. Competition will force the Detroit firms to do likewise. Their business error in making long-term commitments to their unionized workers is being punished by the market, as, from an economic standpoint, it should be. A legitimate concern about health costs is with the expense to the taxpayer of health-care entitlement programs, mainly Medicare. Yet even that concern is exaggerated. The demand for medical care is not as open-ended as the demand for other goods and services, with the exception of such purely optional medical treatments as cosmetic surgery for people who are not severely disfigured and drugs to enhance athletic performance, and such nonillness-related medical expenses are not subsidized. If they were, demand would soar. But most people do not court illness in order to be able to consume subsidized medical care, or demand more medical care than is necessary to treat their illnesses. This means that the demand for medical care is driven primarily by the prevalence of illness and the progress of medical technology rather than by the payment scheme. Even abolishing Medicare, therefore, would probably not greatly affect the amount of money that is spent in the United States on medical care. Whether that money is spent by the sick or by the taxpayer is more than a detail, in part because withdrawal of subsidy might induce people to adopt a healthier style of living, but it is not the principal factor driving total health costs.

Correction--Posner

There is a garble in the arithmetical example at the end of the fifth paragraph of my post on foreign aid. $23,000 - $2,000 = $1,000 should be $23,000 - $20,000 - $2,000 = $1,000. That is, when the welfare recipient's income rises from $20,000 to $23,000, he gains $3,000, but loses $2,000 because he is no longer eligible for the welfare benefit of $2,000. This leaves him with only $1,000 net from $3,000 in additional earnings, yielding a marginal tax rate of 67 percent. Sorry for the mistake.

Should the United States Provide Foreign Aid?--Posner

The United States is frequently criticized for the meagerness, relative to the nation's aggregate wealth, of its contribution to what is called "overseas development assistance," which is to say government financial aid (other than for military purposes) to poor countries. Although U.S. ODA spending has increased substantially since 9/11, as a percentage of gross national income it is, at .22 percent, at the very bottom of the 22 wealthiest countries in the world. (Norway is at the top, with .93 percent.) Aggregate private giving by U.S. foundations, businesses, nongovernmental organizations, colleges (for scholarships), and religious organizations almost equals the government's expenditure; yet even ignoring private contributions by other countries, which though lower in percentage terms than American private giving are not negligible, total U.S. public/private ODA would as a percentage of gross national income fall short of many of the other wealthy nations. (For a useful compendium of statistics and commentary, see "Sustainable Development: The US and Foreign Aid Assistance," www.globalissues.org/TradeRelated/Debt/USAid.asp, visited Jan. 20, 2007.) These figures are meaningless from an ethical standpoint. To begin with, there is a big difference between the amount given and the amount received, administrative costs to one side. Most U.S. foreign aid requires the recipient to spend the money for U.S. goods and services, which are often much more expensive than those available elsewhere. Suppose the U.S. gives a foreign country $1 million for the purchase of goods in the United States that could be purchased elsewhere for $750,000. Then the net transfer is not $1 million but only $750,000. Nor should administrative costs, often inflated, be ignored, or the waste that is endemic in government programs. The largest recipient of U.S. foreign aid today is Iraq, and it seems that much of that aid has been squandered. On the other side of the ethical balance, however, the statistics ignore the benefits that the United States confers on foreign countries by virtue of its enormous defense expenditures (including financial assistance to foreign militaries, but that is only a small percentage of the total defense budget). The United States spends more than 4 percent of its gross domestic product on defense, compared to a world average of 2 percent--and only 1.9 percent for Norway. We really are the world’s policeman, holding a security umbrella over a large number of nations, which would have to spend much more on defense were it not for that umbrella. Of course we do not do this from the goodness of our heart, but to protect our national security--but then very little that government does is motivated by altruism toward foreigners. My own, unfashionable view is that charitable giving, both governmental and private, is more likely to increase than to alleviate the poverty, ill health, and other miseries of the recipient populations. That is a familiar proposition with regard to antipoverty policy on the national rather than international scene. We generally and I think rightly applaud the substitution of workfare for welfare, because welfare promotes dependency by taxing work heavily--if welfare is cut off when the recipient's income reaches, say, $20,000 a year, so that if he was receiving welfare payments in cash or kind worth $2,000 an increase in his income to $23,000 will net him only $1,000 ($23,000 - $2,000 = $1,000), this means that his marginal income tax rate is .67--a potent discouragement to working. Something like this occurs, I believe, on the international scale. Receipt of money enables a government to avoid grappling with the political, social, and economic conditions (cultures, institutions) that are impeding economic development. It has been argued that countries that have enormous natural resources (mainly oil) relative to population seem not to benefit from that gift, as wealth without effort does not create good attitudes toward work, enterprise, and savings, at the same time that it enables the government to defer consideration of its social and other problems. Foreign aid has similar effects. Moreover, the more "generous" the foreign aid, the worse these effects. When foreign aid becomes a significant part of a nation's income, the result is likely to be inflation, waste, corruption, rent-seeking, and indefinite postponement of needed economic and political reforms. Insignificant foreign aid does not have these bad effects, but, by the same token, has few good effects. Of course the donors, both public and private, can and often do attach conditions designed to assure that the money they give is used for constructive purposes. But, first, they do not know what these countries need (the major theme of William Easterly's 2002 book The Elusive Quest for Growth), and, second, unless foreign assistance is a large fraction of the total income of the recipient country, the effect of the assistance, however many strings are tied to it, will tend to be that of an unrestricted grant. If a country spends $100 million on health care, and receives foreign assistance for health care of $20 million, it may decide to reallocate $20 million of the health care expenditures that it makes out of its own resources to some other purpose, in which event the restriction on the grant will have no effect. This is a general problem of charitable giving and public welfare, but it is particularly difficult to solve when the donor is dealing with a foreign country. This point is pertinent to foreign aid for such projects as eliminating (realistically, greatly reducing) such Third World plagues as HIV/AIDS and malaria. The former can be effectively combatted with a combination of public health education and free condoms, and the latter with DDT spraying in people's bedrooms. These are projects within the financial capacity of most Third World countries. The substitution effect will disappear if the foreign money is given for a purpose on which the recipient nation spends nothing (or less than the grant). But if the nation does not value the project, often this will be because the project has little value to the nation. The chalice is poisoned in still another way. The "generous" gifts from wealthy countries--pluming themselves on their greater (apparent) generosity than the United States--enable those countries to hide, perhaps even from themselves, the extent to which their tariff policies immiserate poor countries. Most of them are agricultural producers with costs much lower than in wealthy countries, which use tariffs to shield their farmers from Third World competition even though their farmers are much wealthier that those in the Third World, and would be even without tariff protection. The non-farmer taxpayer in a wealthy country in effect pays his country's farmer twice: in higher food costs or in taxes that finance farm subsidies, and in the taxes that support the government's foreign aid program. No doubt some foreign aid, including nonmilitary aid, advances the foreign policy objectives of the donor nation (though quite possibly at the expense of the populations of the recipient nations), rather that just lining the pockets of domestic producers and enabling publics to feel better about (or simply ignore) their nations' tariff policies. The focus of my discussion has been on the question whether the recipient nations benefit at all. My guess is that they do not. It is just a guess, but it has support in empirical research. I mentioned Easterly's book, and there is much more. And sometimes gross data can be highly suggestive. Africa has received some $600 billion in foreign aid since 1960, yet most African nations are poorer today than they were then. I am mindful that recent economic research has tended to find a positive relation between foreign aid on the one hand and economic growth and improved health in recipient nations on the other; for a recent summary, see Steven Radelet, “A Primer on Foreign Aid” (Center for Global Development, Working Paper No. 92, July 2006). Considering that aggregate overseas development assistance amounts to $92 billion a year (2004), some positive effect can be expected. Yet I remain skeptical. The studies necessarily ignore the tradeoff between foreign aid and tariff reductions; if the former reduces pressure for the latter, the net effect of the aid on the recipient nations could be negative.

Is There a Case for Foreign Aid? BECKER

My answer is essentially "no", with a few small qualifications. Posner gives the main arguments against aid, so I will not go over them. William Easterly among others has written several articles that examine the empirical evidence on the relation between foreign aid and economic growth-see for example, chapter 2 of his book The Elusive Quest for Economic Growth. He and others have discussed foreign government aid to countries in Africa, Pakistan and other Asian countries, and typically have not been able to find any noticeable positive effects of aid on a country's economic growth In this book Easterly discusses in detail aid to Ghana in the early 1960's that helped it build a huge dam and the largest man made lake in the world. This project was at the time supported by some economists with extravagant claims about what it would accomplish: create a new fishing industry, generate electricity, encourage a new aluminum smelting plant, and other benefits. At a huge cost, it accomplished few of these goals-there is a smelting plant run by a private multinational that has had slow growth in its output- but little else that is positive. Indeed, the lake had some serious negative consequences, such as destruction of considerable agricultural land because of the wide area flooded, and the importing to those living near the lake of water-borne diseases, such as malaria, river blindness, and hookworm. India is my favorite example to illustrate the failure of government foreign aid. From the fifties until the end of the 1980's more private and government aid went to India than to any other country. Yet during that same time period, India had a very modest growth in per capita income of about 1 percent per year-sometimes resignedly called in those days the "Hindu rate of growth". I am not claiming that foreign aid was the main source of India's mediocre performance, but it clearly did not overcome the bad economic policies of its government. In fact, aid may well have encouraged these policies as the India government could always count on foreign aid to help it out of the worst aspects of any mess caused by its restrictions on foreign trade, severe controls over private investment even by Indian companies, and neglect of basic education, roads, and agriculture. Fortunately, in the early 1990's, the Indian government recognized that the real cause of its economic problems was not insufficient aid, but its own policies. Reforms at that time include opening up more investments to the private sector, greatly lowering tariffs, quotas, and other barriers to foreign trade, and changes in its thinking about relying on rich countries to help its development. Indeed, India can legitimately claim that now one important obstacle to its growth comes from the very same rich countries which had been important donors because of their import restrictions that hinder the access of Indian farmers and manufacturers to their markets. Foreign aid programs other than of a humanitarian nature are destined to fail because they involve transfers of resources from one government to another. No economist who has closely examined the evidence concludes that the reason why some poor countries fail to have significant economic growth is because their governments have insufficient resources. The complaint is typically that governments do the wrong things with the resources they have, including their regulatory powers. They discourage entrepreneurship, give cronies special advantages in investments or in rights to import and export, over-regulate labor markets, spend too much on public prestige projects, such as domestic airlines and large dams that of little use and yet drain valuable resources, neglect basic education in order to create expensive universities, and so on. Foreign aid only makes it easier to continue to promote projects and policies that are not merely neutral with respect to growth, but hinder any take off into rapid growth. Donor nations are also subject to political pressures that influence the form their aid takes. They attach various strings to the aid that help powerful interest groups in their own countries at the expense sometimes of the aid having any chance of helping recipient countries grow faster. Given the distortions away from effectiveness on both sides of the donor-recipient equation, it is no surprise then most foreign aid has been at best ineffective, and at worst negatively affects the growth prospects of recipients. Does my discussion mean that I oppose all foreign aid except sometimes for military assistance, and for humanitarian purposes? My answer, to repeat, is yes. However, I include in humanitarian assistance aid to combat some of the major diseases in poor countries, although I prefer such aid to be from private foundations and other groups since they tend to be more effective than governments -see my January 1 post on private charities. However, if governments of rich countries do give resources to help fight diseases in poor countries, they should give to private groups in these countries. If they have to give to government agencies, they should stipulate in the grants that recipient governments have to match their own tax revenues in specified proportions to the amounts received in aid.

Posner's Response to Comments on Libertarian Paternalism

Professor Sunstein has posted a response to Becker's and my postings on the University of Chicago Law School blog. It can be accessed at http://uchicagolaw.typepad.com/faculty/. One comment that was made on my post, a comment similar to arguments made by Sunstein and Thaler, is that paternalism can be libertarian if it does not extinguish consumer choice. An example is "cooling off" requirements in laws such as the Truth in Lending Act. The Act does not forbid people to borrow at what might strike an observer as an exorbitant interest rate, but merely gives him an opportunity to rescind without penalty what may have been his impulsive decison to borrow at that rate. It is true that such a law does not interfere with freedom of choice as much as a law imposing an interest ceiling would do. But it does interfere with it to an extent, by increasing lenders' costs. Moreover, if it is true that borrowers would be happier in the long run to have their impulses checked in this fashion, then some lenders would offer the rescission right without prodding by government--in fact it is quite common for sellers to permit consumers to return goods they have bought without penalty. So perhaps the matter of cooling off can be left to the market after all. Here it should be added that impulse control can often be left to the impulsive. "Chocolaholics" may decide not to keep chocolate in their house because they know they cannot control their "addiction" otherwise. There is something to be said for encouraging self-control rather than shifting some or much of the responsibility for impulse control to the government. I distinguish the cooling-off case and self-control issues generally from the trans fat case (to which several of the commenters returned) on the ground that the market may not solve a problem when information costs are prohibitive. They are not prohibitive in the cooling-off case. There is also an empirical question whether cooling-off requirements have any effect, or whether borrowers ignore them as govrernment-mandated paperwork. I don't consider proposals for energy conservation, even when required by government rather than undertaken on purely private initiatives, to be paternalistic. If as I believe the social costs of global warming and excess empowerment of oil-exporting countries are considerable, then government should intervene, since few individuals will reduce their consumption of energy in order to reduce the social costs of energy consumption; the contribution that the individual's change in consumption would make to energy conservation would be virtually zero. I agree with the comments that disavow doctrinaire libertarianism. I am not an "anarcho-capitalist," which is the extreme of libertarianism, or even a strict Millian (nor was MIll!). I'm happy to listen to arguments for government interventions designed to protect people from themselves, even if they are adults and not mentally incompetent. What troubles me is that the interventions may be thought up by officials suffering from the same cognitive or emotional limitations as the consumers or other private individuals with whose choices they want to interfere; that the interventions may be politically motivated rather than based on efficiency norms; and that once one begins questioning consumer competence it is difficult to know where to draw the line. I do think the cognitive and psychological limitations are real, but II happen to think that they are especially serious in a domain of policy that I have written about extensively in recent years--that of national security intelligence, where the limitations--operating on intelligence officers and policymakers, which is to say govenment actors--explain many intelligence failures.

Libertarian Paternalism: A Critique--BECKER

Libertarians believe that individuals should be allowed to pursue their own interests, unless their behavior impacts the interests of others, especially if it negatively impacts others. So individuals should be allowed, according to this view, to buy the food they want, whereas drunk drivers should be constrained because they harm others, and chemical producers should be prevented from polluting as much as they would choose because their pollution hurts children and adults. Modern research argues that sometimes individuals may not have enough information to effectively pursue their interests. In these cases, it may be suggested that government regulations and rules help guide individuals to the better pursuit of interests they would have if they had additional information. A few weeks ago Posner and I debated the role of information in interpreting New York City's recently enacted ban on the use of trans fats in restaurants. A libertarian paternalist is happy to accept information arguments for government regulation of behavior, but typically stresses other considerations. One of the best statements of this view argues that "Equipped with an understanding of behavioral findings of bounded rationality and bounded self-control, libertarian paternalists should attempt to steer people's choices in welfare-promoting directions without eliminating freedom of choice. It is also possible to show how a libertarian paternalist might select among the possible options and to assess how much choice to offer." Cass Sunstein and Richard Thaler, “Libertarian Paternalism is Not an Oxymoron”, University of Chicago Law Review, 70(4), Fall, 2003; for a strong response, see Daniel Klein, “Status Quo Bias”, Econ Journal Watch, August 2004. If not literally an oxymoron, the term "libertarian paternalism" is, I believe, awfully close to it. Before trying to show why, let me illustrate what this expression might reasonably mean--Sunstein and Thaler give some innocuous examples like the placement of desserts in cafeterias that raise no significant issues. Suppose a person smokes, but has an internal conflict between his stronger "self" who wants to quit, and his weaker "self" who continues to smoke whenever he feels under pressure, or in social situations. In effect, the weaker self does not stop smoking because he has limited self-control. The goal of paternalism in this case is to help the more dispassionate self obtain greater control over the choices made by the conflicted individual because of his dual selves. Such paternalism may take the form of high cigarette taxes, so that even weaker selves would not want to smoke so much, or of ordinances to limit smoking in restaurants, bars, and other social situations to prevent weak selves from being tempted to smoke. The argument is that individuals would be "happier" if they were given a helping hand to exercise self-control. One study even claims to find that smokers are happier in states of the United States that heavily tax cigarettes than in seemingly comparable states that tax cigarettes more lightly because higher taxes help control the urge to smoke. If this evidence were valid, groups of smokers should lobby for higher cigarette taxes, yet to my knowledge there is not a single instance where this has happened. Indeed, if anything, they lobby for lower taxes, but perhaps one can claim--most anything goes in such a world-- that they do not even know they have this conflict among their different selves! Classical arguments for libertarianism do not assume that adults never make mistakes, always know their interests, or even are able always to act on their interests when they know them. Rather, it assumes that adults very typically know their own interests better than government officials, professors, or anyone else--I will come back to this. In addition, the classical libertarian case partly rests on a presumption that being able to make mistakes through having the right to make one's own choices leads in the long run to more self-reliant, competent, and independent individuals. It has been observed, for example, that prisoners often lose the ability to make choices for themselves after spending many years in prison where life is rigidly regulated. In effect, the libertarian claim is that the "process" of making choices leads to individuals who are more capable of making good choices. Strangely perhaps, libertarian paternalists emphasize process when claiming conflict among multiple selves within a person, but ignore the classical emphasis on decision-making process that helps individuals make better choices. Two other serious limitations of the libertarian paternalist approach further weaken its appeal. First, it is virtually impossible to distinguish such paternalism from plain unadulterated paternalism. How does one decide with objective criteria where "bounded rationality and bounded self-control" are important, and areas of choice where they are not? For example, models of rational addiction appear to do as well if not better than models of bounded self-control when applied empirically to smoking behavior. Why adopt models of bounded self-control in this case? Or to take another illustration, is the weight gain of teenagers and adults since 1980 in much of the developed world, particularly the United States, due to bounds on rationality and control? If so, why did it not happen earlier, or why is the gain in weight so much greater in the United States than in most other countries? Are Americans less able than say the Japanese or Germans to exercise self-control? Often libertarian paternalism simply involves substituting an intellectual's or bureaucrat's or politician’s beliefs about should be done with other peoples' time and money for the judgment of those choosing what to do with their own incomes and time. It is in good part because libertarians recognize the temptation in all of us to control choices made by others that they end up in favor of allowing people to make their own choices, absent clear negative (or positive) effects on others. A serious problem arises if libertarian paternalism is not just considered an intellectual exercise, but is supposed to be implemented in policies that control choices, such as how many calories people are allowed to consume, whether adults are allowed to use marijuana or smoke, or how much they can save. Even best-intentioned government officials should be considered subject to the same bounds on rationality, limits on self-control, myopia in looking forward, and the other cognitive defects that are supposed to affect choices by us ordinary individuals. Can one have the slightest degree of confidence that these officials will promote the interests of individuals better than these individuals do themselves? This is why classical libertarianism relies not on the assumption that individuals always make the right decisions, but rather that in the vast majority of situations they do better for themselves than government officials could do for them. One does not have to be a classical libertarian--I differ on some issues from their position--to recognize that the case for classical libertarianism is not weakened by the literature motivating libertarian paternalism. Indeed, when similar considerations are applied to government officials and intellectuals as well as to the rest of us, the case for classical libertarianism may even be strengthened!

Libertarian Paternalism--Posner's Comment

The term is indeed an oxymoron. Libertarianism, as expounded in John Stuart Mill's On Liberty, is the doctrine that government should confine its interventions in the private sector to what Mill called "other-regarding" acts, which is to say acts that cause harm to nonconsenting strangers, as distinct from "self-regarding" acts, which are acts that harm only oneself or people with whom one has consensual relations authorizing acts that may result in harm. So, for example, if you are hurt in a boxing match, that is a "self-regarding" event with which the government has no proper business, provided the boxer who hurt you was in compliance with rules--to which you had consented--governing the match, and provided you were of sound mind and so could give meaningful consent. Paternalism is the opposite. It is the idea that someone else knows better than you do what is good for you, and therefore he should be free to interfere with your self-regarding acts. Paternalism makes perfectly good sense when the "pater" is indeed a father or other parent and the individual whose self-regarding acts are in issue is a child. In its more common sense, "paternalism" refers to governmental interference with the self-regarding acts of mentally competent adults, and so understood it is indeed the opposite of libertarianism. The yoking of the two in the oxymoron "libertarian paternalism" is an effort to soften the negative connotation of paternalism with the positive connotation of libertarianism. I would further limit the term "paternalism" to situations in which the government wishes to override the informed preferences of competent adults. The dangers of smoking are well known; indeed, they tend to be exaggerated--including by smokers. (The increased risk of lung cancer from smoking is smaller than most people believe.) Interventions designed to prevent smoking, unless motivated by concern with the effect of smoking on nonsmokers (ambient smoke, which is not much of a health hazard but is an annoyance to nonsmokers), are paternalistic in the sense in which I am using the term. Thus I was not defending paternalism when I defended the ban on trans fats in New York City restaurants. If people are aware of the dangers of trans fats but wish to consume them anyway, the only nonpaternalistic ground for intervention, which I would be inclined to think insufficient by itself, is that they may be shifting some of the costs of their medical treatment for heart disease to taxpayers who forgo consumption of trans fats. If, however, people don't know the dangers of trans fats and it would not be feasible for them to learn those dangers (prohibitive transaction costs), and if as I believe the dangers clearly exceed any benefits from trans fats compared to substitute ingredients, then the ban can be defended on nonpaternalistic grounds, as I attempted to do. Another way to put this is that it is not paternalistic to delegate a certain amount of decision making to the government. There are some goods that government can produce at lower cost than the private sector, and among these is the banning of trans fats from food served in restaurants. It might seem that the good could be produced just by competition-impelled advertising by restaurants that do not use trans fats. But such a suggestion ignores the difference between disseminating and absorbing information. If you have a peanut allergy, and the label on a package of cake mix says that the mix contains peanut oil, you know not to buy it; the cost of absorbing the information on the label is trivial. But if you are told that a restaurant does not use trans fats in its meals, determining the significance of that information to you would require you to undertake a substantial research project. You would have to learn about trans fats, somehow estimate the total amount of trans fats that you consume every year, estimate the amount of trans fats in the restaurant meals you consume relative to your total consumption of trans fats, and assess the significance of that consumption in relation to other risk factors that you have or don’t have for heart disease. Few people have the time for such research, or the background knowledge that would enable them to conduct it competently. Given that trans fats have close substitutes in both taste and cost, it is not unrealistic to suppose that the vast majority of people would if consulted delegate to government the decision whether to ban trans fats. One of the great weaknesses of "libertarian paternalism" is failure to weigh adequately the significance of the operation of the cognitive and psychological quirks emphasized by libertarian paternalists on government officials. The quirks are not a function of low IQ or a poor education; they are universal, although there is a tendency for the people least afflicted by them to enter those fields, such as gambling, speculation, arbitrage, and insurance, in which the quirks have the greatest negative effect on rational decision making. As Edward Glaeser has pointed out, the cost of these quirks to officials--who are not selected for immunity to them--is lower than the cost to consumers, because the officials are making decisions for other people rather than for themselves.

AIDS in Africa--Posner's Response to Comments

One comment in particular merits a response: that Botswana, one of the best-governed countries in sub-Saharan Africa, and one of the most prosperous (its GDP per capita is about $10,000, and thus close to the Republic of South Africa's $12,200), has one of the highest AIDS rates in Africa (24 percent), and therefore I am wrong to suggest that bad government and poverty are the roots of Africa's disproportionate incidence of HIV-AIDS. I had pointed out, however, that the factors that influence a country's AIDS rate are multiple. One of them is migrant labor, which facilitates prostitution and casual sex. Botswana sends many of its workers to South Africa, and also sits astride major north-south traffic arteries. In addition, its relative prosperity has led to rapid urbanization, and cities provide greater opportunities for casual sex than rural areas. Another factor that has undoubtedly influenced the AIDS rate in Botswana is that the AIDS epidemic started in southern Africa, which is probably why the highest African AIDS rates are in the countries of southern Africa, which include Botswana. The epidemic had already spread widely before preventive measures, including education in the danger of the disease, were taken. But that of course cannot explain why Botswana's AIDS rate is higher even than South Africa's. A further point about Botswana is that although its average income is high, because of its diamond mines and tourist attractions, the income is very unevenly allocated. Most of the population is very poor (30 percent are below the poverty level) and 20 percent are illiterate. However, a wealthy country with many poor can pay for public health, and in fact Botswana has an advanced program for combating AIDS by education, free condoms, etc., and has had it for a number of years, so it is a puzzle why the overall incidence of HIV-AIDS remains so high. I want to emphasize two other factors that did not receive adequate attention in my original post. One is that short life expectancies reduce the cost of risky behavior: a 25 percent risk of dying from AIDS is very high, but the expected cost of death that is generated by that risk is lower the higher the probability of dying young from some other disease, a probability much higher in sub-Saharan Africa than in the United States. Another factor is the prevalence of other sexually transmitted diseases, such as syphilis, which increase susceptibility to infection by the AIDS virus. Both of these points are discussed in an early article by Tomas J. Philipson and me on AIDS in Africa--“The Microeconomics of the AIDS Epidemic in Africa,” 21 Population and Development Review 835 (1995)--and in a more recent article by Emily Oster, "Sexually Transmitted Infections, Sexual Behavior and the HIV/AIDS Epidemic," 120 Quarterly Journal of Economics 467 (2005). We note in our article the curious positive correlation in Africa of AIDS with education, and suggest that educated Africans are likely to be urban and therefore have more opportunities for casual sex. On the economics of AIDS generally, see also Philipson's and my book Private Choices and Public Health: The AIDS Epidemic in an Economic Perspective (1993).

Progress in Fighting AIDS in Africa?--Posner

With the decline in AIDS among the white population in the United States, the advent of effective treatment (the antiretroviral drugs), and the slowing in the growth of the international epidemic, Americans' interest in the disease has waned. Only about a third of one percent of the U.S. population is infected by the AIDS virus (HIV), and half of those are black (thus the per capita prevalence of the disease is roughly four times as great as its prevalence among whites). Among whites, the principal means of transmission are homosexual sex; among blacks, heterosexual sex and needle-sharing drug use. The international epidemic is undiminished, indeed growing, though at a diminished rate. Some 40 million people worldwide are infected by HIV, up from 8 million in 1990. But the international distribution of the epidemic is remarkably skewed. In North America and Western and Central Europe, it is only .3 percent, and in most of the world it is no higher than 1 percent. In the Caribbean countries, however, it is 1.2 percent (which is the approximate prevalence among U.S. blacks) and in sub-Saharan Africa it is at least 6 percent and perhaps as great as 10 percent. Because antiretroviral drugs are available to only about 20 percent of the infected population in sub-Saharan Africa, the death rate is much higher than elsewhere, and indeed about two-thirds of the world's AIDS-related deaths occur there. The ratio of total infected persons to annual number of deaths is about 10 percent in sub-Saharan Africa versus 1 percent in the United States. Even within sub-Saharan Africa, there are vast differences in the prevalence of the disease among the different countries. Most of the West African countries, including Nigeria (Africa's most populous country), have prevalance in the 5 to 7 percent range. But there are a number of countries in East Africa, notably the Republic of South Africa, where the prevalence is in excess of 20 percent (it is 24 percent in Botswana, for example). The overall prevalence of the disease in sub-Saharan Africa seems, however, to have peaked, so that the continuing increase in worldwide prevalence is being driven by increases in other countries, mainly in Asia. The disease is a principal focus of foreign aid by wealthy nations, multinational groups such as the United Nations, and private foundations such as the Bill and Melinda Gates Foundation. The total amount of money spent fighting AIDS in other than the wealthy countries has been estimated at $8.3 billion a year, of which $2.6 billion is spending by the affected countries themselves and the rest represents donations--so a total of about $5.7 billion in foreign aid. The money goes for such things as buying condoms, educating people about the disease, training health workers, and buying antiretroviral drugs. There is, of course, a great deal of waste. The United States devotes a significant fraction of its assistance to preaching sexual abstinence and requires that all the condoms it supplies be purchased from U.S. manufacturers, which charge much higher prices than Asian manufacturers. I am dubious that the foreign donations are money well spent, compared to alternatives. This is not because HIV-AIDS isn't a ghastly disease, and economically very harmful because of its debilitating effect on the working-age population, to which most of the victims belong; it is because the causes of its prevalence in those countries in which it is prevalent are social and economic conditions, or political decisions, that must be changed before there can be any real hope of significantly reducing the prevalence of the diseases, and that are unlikely to be changed by foreign money. The causes include profound ignorance about the disease (due in part to superstition and in any event an aspect of much broader deficiencies in education and literacy), miserable living conditions and short life expectancy which reduce aversion to risky behavior, migrant male labor that increases the demand for paid sex, cultural traditions of male promiscuity, female circumcision (a risk factor for HIV), and the extremely low status of women that drives many of them into prostitution and reduces their ability to bargain effectively with men over safe sex, to which men are more averse than women. Underlying all these things is the extreme poverty of most sub-Saharan countries, which in turn stems, in major part anyway. from the dreadful legal and political infrastructure of most of these nations. And, by the way, these awful conditions are not the legacy of colonialism, as is often charged. These countries were better administered when they were colonies, at least those that were French or British colonies; and many other former colonial nations, such as India, Singapore, Malaysia, Tunisia, and Trinidad, are prosperous relative to sub-Saharan countries, while Liberia, a sub-Saharan African nation that has never been a colony, remains profoundly disordered and impoverished. Because of the inadequate legal and political infrastructure in sub-Saharan countries, giving money to these countries for any purpose is likely to be a poor investment. This is dramatically shown by the case of South Africa, which has one of the highest rates of HIV-AIDS of any country in the world. Because of its mineral resources and its substantial white minority, South Africa is by African standards a wealthy country. Its GDP is almost $200 billion. Its leaders have been in a shocking state of denial concerning AIDS. Any money given to South Africa to fight AIDS is likely simply to replace the money that South Africans spend on AIDS. This of course is a general problem of charity, such as food stamps in the U.S.--if charity, even when earmarked for a specific expenditure, is less than the recipient would spend on the item anyway, his consumption of the item will be unaffected. So if a person spends $2,000 of his own money every year on food, and then is given $500 worth of food stamps, he will not eat more (unless having a larger total income increases his demand for food), but rather will spend $500 less out of his own pocket. The same may be true in the case of foreign assistance for fighting AIDS in Africa. An interesting contrast to South Africa is presented by Uganda. Unlike South Africa, Uganda is very poor; its annual GDP per capita is only about $1,500, compared to more than $12,000 for South Africa. Yet its HIV-AIDS prevalence dropped steeply in the 1990s, from 15 percent to 5 percent. Although its prevalence has been increasing somewhat since and there is dispute over the accuracy of the government’s statistics, it is generally believed that the prevalence of the disease in Uganda has indeed declined substantially--and has done so as a result of an inexpensive (only tens of millions of dollars) government campaign to educate people in the danger of AIDS. It is the kind of campaign that virtually any country could afford, without need for foreign assistance. In contrast, the antiretroviral drugs are expensive (even though sold at very low prices for use in poor countries) when the cost of the health-care infrastructure required for their effective administration is taken into account. Yet the drugs, unlike a vaccine (which has proved thus far impossible to develop, because of the extreme mutability of the virus), do not eliminate the disease; a person on the drugs can still transmit the virus. The South African and Ugandan cases suggest that political will rather than huge foreign charity holds the key to reducing the prevalence of AIDS in poor countries. HIV-AIDS is a disease readily preventable by financially inexpensive behavioral changes, such as the use of condoms, once people are alerted to the character and gravity of the disease. A government that communicates effectively with its people and makes condoms cheaply available to them will go far toward reining in the epidemic.